Trolling for a Patent Policy Fix | Commentary

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The America Invents Act, passed in 2011, set out to expedite patent reviews, attack infringement overseas and improve patent quality by ensuring patents satisfy the statutory criteria of being “novel” and “non-obvious” and that their terms clearly describe what is covered, and what is not.

The AIA was a step in the right direction, but it hasn’t staunched the flood of costly and often abusive patent litigation. “Patent assertion entities” (or, less kindly, “patent trolls”) were responsible for 62 percent of all patent suits in 2012, up from 45 percent in 2011, and horror stories regarding the trolls’ seamy litigation tactics abound. The White House and Congress seem to share a consensus that more needs to be done.

The challenge is to strike the right balance between discouraging abusive litigation and making it harder to enforce legitimate patents. Patents create incentives to innovate by giving inventors de facto property rights. Strong patent protections allow innovation-intensive industries such as pharmaceuticals and information technology to earn returns on the huge research and development investments needed to create new drugs and better technologies.

But patents also create the potential for “hold ups,” which exploit sunk cost investments in patented technologies. For example, tens of thousands of businesses have invested billions of dollars in e-commerce systems that include an online “shopping cart.” If a PAE can use a patent to credibly threaten an injunction against use of the entire system, it is in a strong position to demand license fees. And it is usually cheaper for defendants to just pay the toll, even if the patent is likely to be found invalid or not infringed.

Patent trolls don’t play fair. As the White House said in a June report, PAEs “focus on aggressive litigation, using such tactics as: threatening to sue thousands of companies at once, without specific evidence of infringement against any of them; creating shell companies that make it difficult for defendants to know who is suing them; and asserting that their patents cover inventions not imagined at the time they were granted.” Studies have documented the economic costs of such opportunistic litigation.

Trolls are symptomatic of deeper problems with the U.S. patent system, including excessive litigation costs, unclear standards for both patent validity and infringement, wide variations in damage awards and uncertainty over when it is appropriate to impose an injunction (as opposed to monetary damages). In 2012, after throwing out a case involving competing claims by Apple and Motorola over smartphone patents, Judge Richard Posner volunteered in a widely noticed article that “there are serious problems with our patent system” that “warrant reconsideration” by policymakers.

What to do? One obvious solution would be to make it harder for PAEs to bring opportunistic litigation, perhaps, as suggested by House Judiciary Chairman Robert W. Goodlatte, R-Va., by imposing a “loser pays” rule in patent litigation. Others propose making it harder for patent holders to win injunctions, which harm consumers by banning use of a technology altogether. The problems with such bans were illustrated last month, when the White House was forced to overturn an International Trade Commission ban on imports of some iPhones and iPads, which the commission found to infringe Samsung’s patents.

The problem with making it harder to enforce patents is that doing so reduces incentives for innovation. A somewhat different approach involves expanding on the AIA’s efforts to improve patent quality. For example, it is generally agreed that the Patent Office has been too lax in issuing business method patents and that such patents are frequently misused by patent trolls. In response, the AIA created the Covered Business Method program, which allows defendants in infringement suits to seek expedited Patent Office review of business method patents involving “financial products or services.” Reps. Judy Chu, D-Calif., and Darrell Issa, R-Calif., and Sen. Charles E. Schumer, D-N.Y., have now introduced bills to expand the CBM to all business method patents.

Unlike some of the other reforms being considered, the CBM doesn’t raise the costs of enforcing legitimate patents — it just makes it easier to invalidate bad ones. And it would have virtually no effect on patents for “real” innovations like pharmaceuticals and computer chips.

Striking the right balance between innovation and litigation in patent reform is a difficult task, and many reforms — however, necessary — involve trade-offs that will be difficult to achieve, but there is no apparent downside in making it easier to throw out patents that should never have been issued in the first place.

Jeffrey A. Eisenach is a visiting scholar at the American Enterprise Institute and is director of its new Center for Internet, Communications, and Technology Policy.